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An investment of P60,000 can be made in depreciable assets that will produce revenues of P29,000 per year for 5 years
An investment of P60,000 can be made in depreciable assets that will produce revenues of P29,000 per year for 5 years. Annual cost for operations and maintenance will be P12,000 per year. Taxes and insurance will be 2% of the first cost. If the company expects capital to earn not less than 15% before tax, is this a desirable investment. Use sinking fund method to calculate for annual depreciation. What is
the % rate of return?
a. 10.5%
b. 11.5%
c. 13.5%
d. 17.5%
Expert Solution
The answer for this question is letter b. 11.5%
Step-by-step explanation
The formula in solving the % rate of return is net annual profit divided by the investment or the original cost of the property.
We need to subtract all the annual expenses from the annual revenue to get the annual profit.
The annual expenses includes the depreciation (we can solve it by using the sinking fund method which is required in the problem), the operation and maintenance cost and the tax & insurance.
Substituting all the given values to the formula, we can solve the % rate of return which is equal to 11.50%
Please see the attached file below:
https://drive.google.com/file/d/1tU4MAQQ28ISb23-jpURomxa2SM20_4sP/view?usp=sharing
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